The badges of trade

The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic trade / business activity or merely a money-making by-product of a hobby.

Careful consideration needs to be given to deciding whether a hobby has become a taxable trading activity. The approach by the courts in using the badges of trade has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.

HMRC will consider the following nine issues as part of their overall investigation as to whether a hobby is actually a trade:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition.

Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year, tax-free, from their hobby by claiming the trading allowance.

Source:HM Revenue & Customs | 20-11-2023

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